6.6 Processing Prepayments

Prepayments are repayments of principal before it falls due to be repaid. Typically, a penalty is imposed on prepayments, since there is a violation of the contract.

When you define products for borrower leg contracts, you can choose to specify levying a penalty on prepayments, in the Product Preferences screen. You can also specify that the interest on any future schedules must be recomputed when a prepayment is made. The system considers the margin rates maintained for individual participants while recalculating interest.

You specify the prepayment penalty as a percentage, in the LB Schedule Payment screen, when you enter the prepayment.

Interest is calculated on the prepaid portion of the principal, from the value date of the last liquidated schedule till the value date of the prepayment. The penal percentage is also applied on the prepaid principal after adjusting the interest due.

When the borrower makes a prepayment for a drawdown, the redefinition of the tranche repayment schedule takes place as follows:

• Tranche Repayment Rule provided in the Contract Payment screen captures the redefinition rule for tranche repayment schedule, on applying the prepayment amount.
• BorrFFT and PartFFT buttons invoke the Free Format advices screens for borrower and participants. You need to use a new template for prepayment advices.
• Redefinition of the tranche repayment schedule takes place as part of end of day process irrespective of their allocation, using the rules tagged with the prepayment instruction.

Note:

You can capture prepayment on the tranche repayment schedule date provided there is no repayment schedule for the same drawdown captured for that day.

Redefinition of tranche repayment schedule takes place based on the repayment rule mentioned when the actual liquidation amount across drawdowns is greater or lesser than the tranche repayment schedule amount for a given schedule date. The future schedules are adjusted based on the repayment rule (LIFO/FIFO/PRO-RATA) specified for the respective schedule date in the following cases:

• Prepayment/payment redefinition follows the repayment rule in the Manual Payment screen.
• For unscheduled payment processing, system follows the repayment rule in the Unscheduled Repayment screen which is defaulted from Repayment Rule provided in the Manual Payment screen.
• For drawdown booking, if there is no tranche repayment schedule defined for drawdown payment schedules, the system defaults the repayment rule as specified in tranche online schedule tab.
• For payment reversal, system follows the repayment rule specified for the respective schedule date.
• For tranche value dated amendment redefinition, system follows the repayment rule specified in tranche online schedule tab.

Note:

• For auto/manual liquidation for the current day, redefinition of tranche repayment schedule takes place as part of current end of day process. As the redefinition happens in current end of day process, if there are multiple drawdown payments with different rules for the same schedule date, then redefinition for each of the drawdown paid amount is done based on the repayment rule defined in payment screen for each drawdown.
• In case of tranche value dated amendment redefinition, redefinition of tranche repayment schedule takes place along with VAMI.
• You can redefine the tranche repayment schedule based on differential global amount resulted and update the outstanding amount and allocation amount in Tranche Repayment Schedules screen for the respective drawdown as part of Global Amount Amendment authorization.

You can liquidate interest on the principal prepaid in the Contract Payment screen. To do this, click Pop PL Interest button after specifying the principal amount. Subsequently, system displays the interest applicable for the specified principal.

Note:

The Pop PL Interest button is displayed in the Contract Payment screen only for contracts that uses a prime loan product.

The system uses the amount tag INTEREST_ADJ to post interest accounting entries due to prepayment.

Example

Let us suppose that for a drawdown under a tranche of a syndication contract has the following schedule for repayment:

• Total Loan Principal: 100000 USD
• Value Date of the contract: 1^st December 1999
• Schedule:
  • 1^st January 2000 20000 USD
  • 1^st February 200020000 USD
  • 1^st March 2000 20000 USD
  • 1^st April 2000 20000 USD
  • 1^st May 2000 20000 USD

Let us suppose that the interest percentage applicable on the loan is 5%, and the penalty rate for prepayment is 2%.

Let us suppose a prepayment of 30000 USD is made on 15^th February 2000. The two previous schedules, for 1^st January and 1^st February, have been liquidated)

• Interest payable would be computed at 5 % for 14 days (from 1st of February 2000 till the 15^th February 2000), on the schedule amount = (20000 * 14/365* 5) / 100 = 38.4 USD. This interest would be adjusted against the repaid amount.
• Penalty amount for prepayment (at 2 %) = (2/100 * (30000 – 38.4)) = 599.23 USD

The interest component that has been adjusted against the repaid amount is booked under the amount tag INTEREST_ADJ.

This topic contains the following sub-topics:

• Prepayment Processing for Value-Dated Amendments